Peeling Back the Fiduciary Layers and Unscrambling the Fiduciary Confusion
Who Are Your Plan Fiduciaries?
An Essay for Plan Sponsors, Plan Officials, Administrators, Committee Members and Interested Parties
Craig Freedman, Registered Fiduciary™, The Retirement Readiness Institute
Jeffrey D. Zimon, Esq., Zimon LLC
Introduction -- There Are Many Fiduciary Roles, Which Can Be Confusing and Confusion Creates Liability
Plan sponsors, officials, administrators (not to be confused with a third party administrator ("TPA")) and Committee members need to identify the individuals and entities that serve as fiduciaries, and understand their respective responsibilities to their retirement plan. Equally important is the selection of service providers whose interests and function need to be well aligned with that of the plan sponsor and the plan. Plan sponsors and officials must understand and know when they are exposed to fiduciary liability as a plan official, or even personally exposed to liability in certain instances, and when the plan's service providers accept a fiduciary role.
Very often confused, misapplied, misrepresented and misunderstood are the roles and responsibilities of plan fiduciaries, the actual identity of the individuals or entities who are fiduciaries, and the rules that apply to fiduciaries under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Because of these misapprehensions, it is often necessary for plan officials to rely upon the expertise of others to assist them. Nevertheless, plan fiduciaries, whether individuals or entities, must be identified and their roles and responsibilities need to be well understood and adhered to.
In this article, we will identify the various categories of fiduciary relationships that apply to retirement plans, referring mostly to the 401k retirement plan. This article is designed to aid plan sponsors and officials in understanding their role, and the role of their plan service providers. It is important for plan sponsors to understand whether their providers are accepting a fiduciary role and if so, what the service providers are actually providing in terms of relative value. It is equally important for sponsors and plan officials to be armed with the information needed to assess the risks and allocate and authorize the fiduciary responsibilities accordingly, so they can focus on their businesses and not on their 401k plan.
To provide some clarity, this article focuses on the various fiduciary positions in an overview fashion. The many fiduciary roles that are often discussed and written about, which are often confused or misunderstood, include the following:
Within each topic, we address the limits that are often overlooked in these roles. We also address how the fiduciary function/scope is never an all or nothing proposition. It is important to both understand the identity and responsibility of fiduciaries as well as the limitations and gaps that may exist. Our intent is to aid the reader in understanding the various fiduciary and non-fiduciary roles associated with the plan, and assist the reader in working towards improving their understanding of the various fiduciary lines of authority and structure, to reduce risk and improve plan operations.
The 3(21) Discretionary Fiduciary for Management of the Plan and/or Assets
ERISA Section 3(21) provides the foundation of the identification of the fiduciaries who are responsible and liable to a plan. This section of ERISA, at subpart A, provides that a person (defined to include entities) is a fiduciary with respect to a plan to the extent:
(i) he (or she or it) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets;
(ii) he (or she or it) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so; or
(iii) he (or she or it) has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 405(c)(1)(B)(the person designated by the Named Fiduciary).
The "who" that can serve as a fiduciary under ERISA is broad and can be any person or entity. Watch out for corporations, because some may not have the requisite corporate authority to act in this capacity. Yet, under ERISA, this role is interpreted broadly. Also watch out for potential personal exposure, when you may think that a corporation is the fiduciary, but it is actually an employee or plan official employed by that corporation!
The "what" is the fiduciary function, really comes down to several things. First, it is always "to the extent," which refers to the concept that the fiduciary role is not "all or nothing." The roles and responsibilities are and can be allocated and defined. The starting point for this evaluation is the plan document and any auxiliary agreements. Second, is the activity or conduct of the person or corporation involved and whether that activity or conduct falls within the scope of fiduciary conduct. The starting point for looking at activities and conduct is whether the person or entity is acting with discretionary authority or discretionary control over the plan operation or administration, or assets. Any actions that involve discretionary authority or control will be fiduciary in nature.
Finally, with respect to investment advisory services, when there is investment advice delivered to a plan for a fee, then there is also a fiduciary role established for the advisor. The mere movement of money on direction from a fiduciary from one account to another, or the act to undertake or complete an investment at the direction of a fiduciary is not a fiduciary act, even if there is a transaction fee. It is the delivery of investment advice for a fee that creates the fiduciary role in this regard. We will discuss and define investment advice later in this article under The 3(21) Non-Discretionary Fiduciary, Investment Advisors.
The Functional Fiduciary -- The Catch-All Under ERISA 3(21)
This section of ERISA also gives rise to the all-encompassing "functional fiduciary" role. The broad spectrum of any discretionary authority or control under ERISA 3(21) creates the catch-all fiduciary principal, defined by the courts as the functional fiduciary. The basic principal in this regard is that any person that engages in any discretionary authority or control over these aspects of a plan is a fiduciary. This is regardless of whether there is an agreement, or whether the person intends to engage in this conduct or not. If you function as a discretionary fiduciary under ERISA, you are one.
The Named Fiduciary -- The Highest Level Fiduciary
This critically important function is defined under ERISA as the "Named Fiduciary." Under ERISA Section 402, each plan must have a Named Fiduciary. A great deal of time and effort is spent on understanding the other fiduciary roles and responsibilities, yet most plan officials do not truly understand this specific and required role and how it may impact plan operations, and related risks. By law, this is the fiduciary (through its authorized agents, as applicable) that all participants and beneficiaries can turn to regarding all of the fiduciary functions under a particular plan. Ultimately, a participant can turn to the Named Fiduciary to determine who is the responsible fiduciary with respect to each aspect of the plan.
What does the Named Fiduciary normally mean to the common 401k plan?
The Named Fiduciary can appoint others to provide various levels of support, both fiduciary and non-fiduciary in nature. Delegation of responsibilities may also be undertaken in the plan document itself, which is often recommended. The Named Fiduciary can delegate responsibilities to an administrator, to a Trustee, an investment advisor, an investment manager and other responsible fiduciaries. It is important to establish, when possible, that a company or corporate entity is given the role of the Named Fiduciary -- as opposed to any individual or to some vague reference to some group of people or committee. The corporate form can provide certain protection from personal liability, but that corporate structure must be in place, in operation and maintained.
Regardless of the identity of the Named Fiduciary, the function and operation is critical. So, finding the right service provider can then make all of the difference in terms of exposure, service and comfort.
The best solution is for the plan sponsor to create a structure for plan administration, operation, investment management and custodial services that best serves the participants and beneficiaries and properly allocates responsibility amongst the various service providers. The Named Fiduciary must be cognizant of any conflicts of interest and determine whether the service provider selected is contractually accepting of the role and responsibility, or running from it. For example, many companies and service providers offer "fiduciary services" or "fiduciary warranties," but in reality, when you read the fine-print, they offer nothing of value. Congruently, it is prudent for the Named Fiduciary to align itself with service providers of high-caliber and capability who are able to provide real value to the plan and to alleviate fiduciary risk, not increase it. Sometimes this is accomplished, and other times not.
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Find more on this topic here: Fiduciary Responsibility and Liability Issues.
The information provided here is intended to help you understand the general issue and does not constitute tax, investment or legal advice. Use of any information from this article is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness.